The tragic events of September 11 seem to demand
comment.But I am at a loss as to
what to say that has not already been said many times over.I offer my prayers to the victims and to their families.

I will not speculate on the motives and methods of the
attack, or our response.I will,
however, comment on the effect of the attack on our markets.

Wall Street never needs much in the way of a reason to
sell off, and this event certainly gave ample cause.Stocks were pummeled, giving up 15% on the Dow and almost 16%
on the S&P 500 for the quarter.The
NASDAQ is down by more than 39% so far this year, and that is on the heels of a decline of 40% the year
before.Bonds were the haven, as
money sought safety.

The press has made much of the fact that the week
following the attack was the steepest decline since the Great Depression.

To put this into perspective, the 1973-74 drop totaled
45% over about 18 months.As I
write this, the Dow is off 23% over the last 21 months, the S&P is down 31%,
and the NASDAQ has lost about 67%.To
look further for parallels, the eighteen months of decline in 1973-74 carried
the market to lows it had not seen for 10 years.An equivalent move today would push the Dow to the low 3000’s and the
S&P to 400, levels 60-70% lower than we stand today.

No one, including me, is projecting such a drop, but I
hold that view only in the absence of further (and unforeseen) activities by
terrorists or military action.I am
groping for historical comparisons and find that I have nothing in my 35-year
market experience that directly compares.

“When profits went up,” Dilbert notes sardonically,
“it was great management, but when profits go down, it’s the lousy
economy.”Or in this case,
suicidal religious or political fanatics.Profit
is what ultimately drives the markets.And
when it comes to profits, Wall Street has always rewarded consistency.

In the second quarter of 2001, as I have mentioned in my
last letter, the net income of America’s largest firms fell by something in
the neighborhood of 65%.The third
and fourth quarters, soon to be reported, promise to be equally dismal.

This sounds catastrophic, but I would like to point out
a salient fact:when companies
cannot avoid showing poor earnings, they often will “clean out the
basement”, throwing every lingering write-off they can find into the current
report.In light of recent events,
my guess is that American corporations will find this to be a very opportune
time to take such action.

With the markets at these low levels, and with the
threat of violence still rampant, companies will most likely be forgiven poor
reports over the next three or four quarters.(By “forgiven” I mean that their stocks will not be punished much
more than they already have been.)Thus,
I will not view the upcoming reports with quite as much negativity as some.

By this time next year it is my expectation that
earnings comparisons will start to look better.If there is no further pressure on the markets from military or terrorist
activity we can reasonably expect an upturn in the economy and the stock market
by mid- to late-2002.With stocks
at their current beaten-down levels, it would not be much of a stretch to view
this as a buying opportunity.

I am currently advising equity investors who have held
cash on the sidelines to invest 25-30% now, and to repeat that action each time
the market drops by an additional 20-25%.I
am further advising investors to assess what percentage of their assets they are
comfortable investing in stocks versus bonds.